A beginner’s guide to self-invested personal pension (SIPP Pension)

The prospect of a comfortable retirement usually means saving for the future well in advance of turning 65. In the UK there are many ways that you can save into a pension pot, whether that be a workplace pension, a private pension, or even through an alternative type of savings account. One type of pension that often goes overlooked is a self-invested personal pension. This article will cover everything you need to know about self-invested personal pensions including what they are, how to start one and whether or not they are the right pension for you.

What are self-invested personal pensions?

Self-invested personal pensions are a type of government-approved pension scheme. Self-invested personal pensions, also known as SIPPs, give the account holder freedom to choose how their pensions are handled. In other words, SIPPs allow users to make their own investment decisions which means that the money put into the pot can be invested how you choose.

SIPPs work in a similar way to a standard pension pot. The main difference is that users have more flexibility with how their money is invested. Some pension providers will offer a wider range of investments than others and just like regular pensions, your workplace is able to make contributions to your SIPPs account.

How do SIPPs work?

As with regular pensions, SIPP holders can make regular contributions into the pension pot monthly or yearly (or as a lump sum). Furthermore, employers can also contribute to a SIPP account. Holders can make their own decisions about how their money is invested. Alternatively, you can hire a financial advisor to help you make the best investment decisions to build money for your future.

SIPPs offer a number of different investment options that account holders can invest in including company shares, collective investment, investment trusts and property or land. Some SIPP providers may offer additional options and it is worth looking into this before you choose which provider to open an account with.

When you open a SIPP account you can choose exactly how much money is saved and how often you make contributions. For example, you could make small contributions regularly or pay money as a lump sum into the account at the end of every year.

Do SIPP contributions qualify for tax relief?

Any money that is put into a SIPP account qualifies for tax relief in the UK. This means that your contributions will be boosted by a payment from the government. The contributions that you make will receive the basic rate income tax relief. For example if you contributed £2,000 into your SIPP account you would get a £500 tax relief bonus from the government. This would leave £2500 in your SIPP account. Higher rate taxpayers can claim extra tax relief through their self assessment tax return.

Tax relief only applies to those who are living in the UK. However, it is worth noting that there are limits to how much you can contribute into your SIPP each year and how much tax relief you can claim on this.

Can you have a SIPP and a workplace pension?

Most UK citizens will have a workplace pension that is set up by their employer when they start in a job position. It is possible to have both a SIPP account and a workplace pension. However, to make the most from your pension pot, it may be better to put money into a workplace pension first if your employer matches any contributions that you make into it.

Nevertheless, setting up a SIPP allows you to take control of the investments that you make. If you make good investment decisions the rate of return on your SIPP account may be higher than that on the workplace pension. However, there may be costs involved in opening a SIPP account which could make a workplace pension the cheaper option.

Does saving into a self-invested personal pension affect my lifetime allowance?

Just like other pension pots, SIPP contributions will affect your lifetime allowance and your annual allowance. This means that any contributions made into your step will be deducted from your lifetime allowance - the limit to how much you can save into your pension pot.

SIPP fees explained

There are a few fees involved with opening up a SIPP account. The account can either be low-cost or full fee accounts. Low-cost self-invested personal pensions come with fewer investment options, giving you less variety of the investments that you can make. Full sip accounts offer wider investment options but come with higher charging structures.

While the latter does give you more exposure in the investment market, full SIPP accounts come with high fees. These cover the costs of setup charges, investment charges, and platform and service charges. SIPPs also charge administration charges and dealing fees. You may also need to pay a financial advisor to help you make the best investment decisions.

When can I withdraw money from a SIPP?

You can withdraw money from your step from the age of 55. This will be rising to 57 in 2028. SIPP account holders can choose between a number of options when taking out money from their pension pot.

When you reach the age of 55 you can keep your pension savings where they are and withdraw them at a later date. Alternatively, you could use the money that you have saved to buy a guaranteed income for life. This is also known as a lifetime or fixed-term annuity. The income that you get from this is taxable.

Similarly, you can choose to take out your pensions in a number of lump sums. However, it is worth noting that 25% of each withdrawal will be tax-free and the rest is subject to tax. If you take your pension out in one go, the first 25% will also be tax-free and the rest taxable.

It is also possible to mix up your options and choose exactly how you would like to withdraw your pension and spend your money in retirement.